Accounting For Frequent Flyer Plans Under GAAP & IFRS Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

ANSWER 1:

The Frequent Flyer Plan (FFPs) is used by the airline industry, which offersa loyalty program to their customers in mileage. Under this program, the customer only pays for themileage he flew.

FREQUENT FLYER PLANS (FFPs) UNDER GAAP:

GAAP offered specific guideline to recognize the loyalty program under the financial statements such as balance sheet, income statement and financial disclosure. The two approaches are used under the GAAP, such as a deferred revenue approach, incremental cost/provision approach.

Incremental Cost approach:

The loyalty program is considered as the marketing expense and company recognize the payments in the period in which the customer of the loyalty program earned profits from the program. Moreover, the company creates the provision of the future obligation in terms of the company’s loyalty program customer.

Incremental and full cost estimation determines the cost on the various practices, which has developed. Furthermore, loyalty cost would be recognized as cost of goods sold in this program. Meanwhile, under the full costing approach loyalty program is measured on a fair value basis. Airline Company eliminates the obligation of the redemption of the customers' point earned under these approaches while utilizing the air services.

Deferred Revenue Approach:

The points that are earned under the loyalty program are considered as sales by the company. Airline Company record as a revenue for the company until the customers' point are redeemed or expired. The fair value concept is also considered for the cost estimation under the deferred revenue approach.

Meanwhile, these two approaches create a liability account as program liability in the incremental cost approach and it records unearned revenue under the deferred revenue approach, and this liability and unearned revenue should be recorded in the period in which the loyalty programs is earned, redeemed or expired as the case may be.

Liability recorded above would affect the net income of the company. Liability recorded is normally greater in revenue approach as compared to the incremental cost approach. Furthermore, the liability recognized above is greater in the incremental approach because the cost incurred under this approach is less than the revenue recognized.

ANSWER 2:

The different provision under the international reporting framework that are applicable to the frequent flyer plans are; the credit earned in the loyalty program by the customers under the deferred revenue method that mustbe recordedin the balance sheet of the company separately.

Meanwhile, the remaining part of the sale would be recognized in the income statement and the remaining portion as the loyalty point’s value under the loyalty program. This should be recorded when the customer earned points at the time of purchase of services or already points to reach the maturity. Furthermore, the provision created to calculate the fair value of the deferred revenue when the customer purchases the loyalty program. The provision is the guidance of recording the point’s value paid by customers.

ANSWER 3:

Principles Based vs. Rules Based

The difference between the U.S generally accepted accounting principles (GAAP) that is U.S GAAP is rule based as compared to international financial reporting framework (IFRS), which is a principlebased.

U.S GAAP focus is on the literature research, whereas the IFRS focus is on the review of the pattern fact more thoroughly.The standards board of the principle based accounting system to interpret the key areas, and provide some exemptions, as compared to the rule based system, which provides no such clarification of the interpretation. Furthermore, IFRS explains more clearly and made it easy to set the rules and regulation for the company, rather than set principles. IFRS is based on fewer exemption as compared to the rule based system that is U.S GAAP.

Consolidation of the financial statement of the company, IFRS is in favor of the control system that how much percent the entity has control over the other entity, meanwhile the U.S GAAP prefers the risk and reward model. Moreover, last in first out method of inventory valuation is not allowed under the IFRS, but still U.S GAAP is following the technique of the LIFO inventory valuation method. Research and development cost are capitalized under the IFRS system, meanwhile, it is treated as an expense under the U.S GAAP system................................

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